Barnes and Noble faces a challenge that has not been clearly spelled out

The sudden dismissal of Ron Boire, the CEO of Barnes & Noble, follows the latest financial reporting from Barnes & Noble and has inspired yet another round of analysis about their future. When the financial results were released last month, there was a certain amount of celebrating over the fact that store closings are down compared to prior years. But Publishers Lunch makes
clear that store closings are primarily a function of lease cycles, not overall economics, and we have no guarantees that they won’t rise again this year and in the years to follow when a greater number of current leases expire.

Although PW reported immediate dismay from publishers over Boire’s departure, there has been plenty of second-guessing and grumbling in the trade about B&N’s strategy and execution. Indeed, getting their dot com operation to work properly is a sine qua non that they haven’t gotten right in two decades of trying. But one thing Boire did was to bring in a seasoned digital executive to address the problem. This is presumably not rocket science — it isn’t even particularly new tech — so perhaps they will soon have their online offering firing on all cylinders.

The big new strategy they revealed, one they’re going to try in four locations this year, is what they call “concept stores” that include restaurants. And, although it was a bit unclear from their last call whether the store-size reduction they’re planning extends to these restaurant-including stores, they have said that the overall store footprint they’re planning will be 20-25 percent smaller than their current standard. These two facts both make the point that B&N is facing a reality which has become evident over the last decade, and which questions a strategy and organizational outlook that was formulated in another time. If this new challenge is properly understood, and I haven’t seen it clearly articulated anywhere, it would make the restaurant play more comprehensible. (Note: I have to admit that my own recent post, where I traced the history of bookstores in the US since World War II, failed, along with everybody else, to pinpoint the sea change that makes B&N’s historical perspective its enemy while trying to survive today.)

Here’s the change-that-matters in a nutshell. A “bookstore” doesn’t have the power it did 25 years ago to make customers visit a retail location. Selection, which means a vast number of titles, doesn’t in and of itself pull traffic sufficient to support a vast number of large locations anymore. This changes the core assumption on which the B&N big store buildout since the late 1980s was based.

This has been true before. One hundred years ago the solution to the problem became the department store book department. Post-war prosperity grew shelf space for books, but the department stores remained the mainstays for book retail. The first big expansion of bookstores started in the 1960s when the malls were built out, which put Waldens and Daltons in every city and suburb in America. The mall substituted for the department store; it delivered the traffic. In fact, department stores “anchored” all the malls to be sure they’d get that traffic!

(Here are a couple of additional factoids to illustrate the importance of the department store channel in the mid-20th century. When Publishers Weekly did an article about the Doubleday Merchandising Plan in 1957, the stores they used as examples were the book departments of Wanamakers and Gimbels! When I came into the business fulltime in the 1970s, there were two significant “chain” accounts in Chicago: the bookstore chain Kroch’s & Brentano’s and the Marshall Field department stores.)

Bookstore customers came in many flavors, but they all benefited from a store with greater selection. My father, Leonard Shatzkin, first noticed that selection was a powerful magnet when he was overseeing the Brentano’s chain (no relation to K&B in Chicago) in the 1960s. Their Short Hills, New Jersey store was an underperformer. They doubled the number of titles in it and it became their best performer. Whether the bookstore customer knew what they wanted or just wanted to shop, the store with more titles gave them a better chance of a satisfying result.

Over time, that understanding was followed to a logical conclusion.

By the late 1980s, it appeared that standalone bookstores outside of malls could become “destinations” if their selections were large enough, and that created the superstore expansion: B&Ns and Borders. But, only a few years later when it opened in 1995, the universal selection at Amazon mooted value of the big-selection store, especially for customers who knew before they shopped what book they wanted. Selection as a traffic magnet stopped working pretty quickly after Amazon opened in 1995 although it was not so immediately obvious to anybody.

I had some experience with B&N data that demonstrated pretty emphatically by 2002 that the action on slow-selling university press titles had shifted overwhelmingly to Amazon. (At that time, the late Steve Clark, the rep for Cambridge University Press, told me that Amazon was a bigger account for CUP than all other US retail combined.) It took the further hit of expanded Internet shopping at the consumer level, which grew with increased connectivity even before ebooks, to make what had been a great business obviously difficult. Then, as if to emphasize the point, we lost Borders…

What just doesn’t make it anymore, at least not nearly as frequently, is the “big bookstore”. Although there is no scientific way to prove this, most observers I’ve asked agree that the new indie stores popping up over the past few years tend to be smaller than than the Borders and older indie stores they are replacing. We are seeing book retailing become a mix of pretty small book-and-literary-centric stores and an add-on in many places: museums, gift shops, toy stores. These have always existed but they will grow. And true “bookstore” shelf space will shrink, as has space for “general” books in mass merchants. The indie bookstore share will definitely continue to grow, but whether their growth will replace what is lost at B&N and the mass merchant chains is doubtful. Every publisher I’ve asked acknowledges significant indie store growth in the past couple of years, but they are also unanimous in saying the growth has not replaced the sales and shelf space lost when Borders closed.

Barnes & Noble is clearly rethinking its strategies, but this is one component that I have never seen clearly articulated. Back when I had my “aha!” moment about what was happening with the university press books, I suggested to one B&N executive that they had to figure out how to make the 25,000-title store work.

He said, “that’s not where we are. We’re thinking about the million-title store!” In other words, “we want to manage big retail locations”. This is thinking shaped by what we can now see is an outdated understanding of what the value of a big store is. So now they’re trying to sustain slightly-smaller big locations with things other than books. (Whether they plan to go as low as 25,000 titles in stores that used to stock four or five times that many is not clear. But they did say in their recent earnings call that the new concept stores would get 60 percent of their revenues from books, rather than the 67 percent they get now.) They have added non-book merchandise; now they’re thinking about restaurants. All of that is to increase traffic and to increase sales from the traffic they already get.

But there is another way to attack the challenge that “books alone” doesn’t work the way it used to. Barnes & Noble’s core competency is book supply to retail locations anywhere in the United States. Nobody, except Ingram, does this as well. (Although Amazon clearly is now planning to give it a try.)

Other retailers are suffering the same Internet sales erosion as booksellers, and a properly-curated selection of books can work for just about any store’s customer profile. Might Barnes & Noble complement its own stores by offering branded B&N Book Departments to other retailers? Let them bring in the traffic (although the books will undoubtedly bring in some more) and then B&N could manage those departments. (This is a variation of a tactic I suggested for Penguin Random House some years ago.) Let other retailers play the role the department stores and then the malls played for books in the past 100 years. Let’s not require the retail customer to come to a location strictly to shop for books.

The “trick” would be for B&N merchandisers to adjust their book selection to suit the specific customer base each store attracts. But is that a harder challenge than going into the restaurant business? And isn’t extending the B&N brand for books a more sensible tactic than trying to extend it to food? Or to create a new brand for food? And wouldn’t it be a good idea to get started on this tactic to expand book retail shelf space before Amazon, which keeps showing signs of wanting a retail presence, does?

This is not an easy market to just walk in and take over. There are already wholesalers providing books to retailers who don’t support a full-fledged buying effort for them. Those wholesalers are often getting more margin from the publishers than B&N is now, but that’s actually more of an opportunity than an obstacle. Presumably, a B&N-branded book section is worth something. (If it isn’t, that’s another problem.) Presumably, B&N has buying expertise and domain knowledge that would enable them to fine-tune a selection of books for each outlet’s customer base. And, presumeably, B&N’s supply chain efficiency would be superior to anybody else’s in the industry, except Amazon’s and perhaps Ingram’s.

The big bookstore model is an anachronism. Just making it big doesn’t pull in the customers anymore. So a new strategy is definitely called for. B&N is going part of the way to one by recognizing that they need to do more to bring in customers and, at the same time, they can’t profitably shelve 100,000 titles across hundreds of stores. Taking their capabilities to where the customers already are would seem like an idea worth exploring.

It should be noted that the Indigo chain in Canada, under the leadership of owner Heather Reisman, has apparently successfully transitioned to a “culture” store where books are the key component of the offering. She has apparently found a product mix, or an approach to creating one, that is working for Indigo. Every large book retailer in the world is going to school on what Indigo has done. Because Amazon and online purchasing in general have not taken hold in Canada the way they have in the United States, we can’t jump to the conclusion that the Indigo formula could be successfully applied here. But it sure wouldn’t be a crazy idea for B&N to buy Indigo to gain the benefit of Reisman’s insights and expertise, assuming that a) Canadian law would permit U.S. ownership of such an important cultural asset and b) Reisman herself would sell and then work for somebody else. Two very big assumptions.